The conversion of vacant workplace area for residential use is one approach to improve the provision of housing, particularly multifamily rental housing. Nevertheless, the low differential between Class B workplace lease and Class A residential lease and rising building prices create headwinds for the conversion of vacant workplace area in main metro areas, notably in San Francisco, Washington DC, and New York. Chicago has the very best present potential for office-to-residential conversion.
Main metro areas nonetheless haven’t recovered from the loss in workplace occupancy throughout 2020
As of the second quarter of 2022, workplace occupancy is down by practically 115 million sq. ft (MSF) in comparison with 2020 Q1. The six main business metro areas are nonetheless affected by extreme losses in workplace occupancy: New York (-29.2 MSF), Los Angeles (11.5 MSF), San Francisco (9.4 MSF), Chicago (9.2 MSF), Washington, DC (9 MSF), and Boston (2.8 MSF).
Modest workplace and condominium lease differentials in six main markets
Many elements decide the feasibility of changing from an workplace to a residential constructing1 however one key determinant is the distinction between present workplace and condominium rents and the outlook for rents and emptiness charges, as documented in a NAR examine.
The desk beneath exhibits modest beneficial properties in lease from the conversion of workplace to residential use. These modest beneficial properties may be offset by the price of building, which is rising 17% year-over-year nationally.2
In comparison with the opposite metro areas, Chicago has the very best potential for office-to-residential conversion based mostly on lease differentials. Within the metro space in Chicago, the workplace lease on Class B continues to be increased at $25/SF in comparison with $30/SF for a Class A condominium constructing, or a 20% acquire.
In New York, the asking lease/SF on Class B workplace models (we take into account Class B as a result of there’s extra vacant area for Class B than Class C) is $46, in comparison with $51/SF for a Class A unit, or 11% extra for an condominium unit. Nevertheless, rising building prices of 17% could be a disincentive for an office-to-residential conversion because it will increase the interval to make a return on the funding.
In Boston, the workplace lease for Class C models is $33/SF, in comparison with $37/SF for an condominium unit, or a 12% acquire for an office-to-residential conversion. This lease differential can be decrease than the rising price of building. Furthermore, Boston is experiencing robust demand for business area from life sciences corporations, so the better potential for conversion is from an workplace to a lab science facility.
In the meantime, in each San Francisco and Washington DC, the workplace rents of Class B models are nonetheless increased than the lease on Class A residential models, which enormously discourages office-to-residential conversion.
In San Francisco, Class B workplace rents of $58/SF should fall by 13% to be on par with the $51/SF of Class A condominium lease.
Within the District of Columbia, Class B workplace rents of $34/SF additionally should fall by 13% to be on par with the $30/SF of Class A condominium lease.
Monetary assist from state/native authorities could make office-to-residential conversions possible
As a result of there’s nonetheless a low market-driven incentive for office-to-residential conversion, such conversions—particularly to supply reasonably priced housing—are more likely to want monetary assist from the state or native authorities and even the federal authorities. For instance, as documented in NAR’s examine on conversions, the conversion of an workplace constructing to be used as a everlasting homeless shelter (Cordell Place) obtained an $8 million mortgage from Montgomery County, MD. Within the conversion of an workplace constructing into effectivity unit residences (Octave 1320), Montgomery County invested $4.1 million.
1 Workplace buildings with deep ground plate are tougher and costlier to transform than buildings as the inside area doesn’t have entry to pure gentle and home windows. Older buildings even have extra potential for conversion as they’ll should be transformed anyway to compete with newer inventory.
2 Supply: US Census Bureau Building Worth Index for a single-family home as of February 2022.